By: Robert C. Hackney
What the heck is blockchain anyway?
A simple question, a not so simple answer.
Business owners have told me that they have heard of blockchain, but are not really sure what it is. In an effort to give them some guidance so that they can understand the basics of blockchain, and how it will impact every business and every industry in the near future, I have provided the following information:
Blockchain Introduction
This is not meant to be a technical treatise. It is not full of computer jargon. It is a non-technical, non-computer language explanation of the basics of Blockchain technology.
Lots of people know how to drive a car and fully understand the impact an automobile has on their lives. Yet most people don’t comprehend how the systems under the hood work to make the car function. In the same way, there is no need for you to understand the technical aspects of Blockchain technology to fully appreciate the impact it can have on your life.
The story of Blockchain starts with the digital currency Bitcoin. While everyone has undoubtedly heard of Bitcoin by now, people think if it as a digital currency and don’t ponder much beyond that point. What they usually don’t know is that Bitcoin was created using a unique process known as blockchain technology. Blockchain technology is a much misunderstood process, and most people with any familiarity with it only have a hazy idea of the concept and how it works, or is designed to work.
A Matter of Trust
The most basic and simple explanation of what Blockchain is, is that it is simply a way to obtain information that you can trust, even if you don’t have any insight into the source of the information.
We all remember Ronald Reagan’s famous line “Trust, but verify.” The verification through Blockchain technology creates the trustworthiness of the information that we receive.
When information is passed around, or there is some form of an exchange for value, the main component in those situations is trust. Blockchain lets you trust the system, so you don’t even need to worry about trusting the source, and while there are presently systems to solve this issue now, most are complex and none of them are nearly as reliable as the potential of Blockchain.
Simple Definition
What is a “block?” Data from a specific transaction is contained in files which are referred to as blocks. These blocks are streamed or sequenced to form a contiguous chain of blocks (ie: a “blockchain”). Any particular transaction in any block can be verified by the sequence in which it occurred. Each block references to the immediate preceding block.
Blockchain History
Yes, I know that many people don’t like history, and don’t want to hear about what happened in the past, they just want to know what will happen in the future. In this case, however, knowing a little about where Blockchain originated will help understand what it has done, and the potential of what it can do.
Way back in the dark ages of 2009 someone created a unique computer source code. That computer source code is known as “Bitcoin.” The creator used the name “Satoshi Nakamoto” which everyone now knows was just a nom de plume. No one knows who Satosti really is, and I am sure that she, he or the group likes it that way.
Bitcoin was designed to have a limited number of coins, and is simply a digital currency not backed by a government or any assets. Was it done as a serious attempt to create a non-government digital currency or was it created as just a fun project by some computer game designers? No one really knows the answer to that question.
You can’t find Bitcoin in any one place, it does not exist on one computer server, and in any one file. Bitcoin is recorded in multiple places simultaneously.
Think about the original concept of the Internet. The U.S. government (primarily the military), wanted to make sure that in the event of an attack, an enemy could not take out our communication systems by attacking one or more strategic targets. The system is set up as a network, so that if one avenue is blocked, the information packets from computers just take another route, and communications can continue.
The Bitcoin concept is similar, in that it does not exist in a file that can be invaded or attacked. The system is peer-to-peer, so there are many computers that have this information, so a central database does not exist. If there were a central database, it could be hacked, but it is not possible to hack thousands of databases simultaneously. This is why Blockchain technology is referred to as a distributed database system, and as a decentralized system. It is also encrypted, using state of the art encryption systems, and public in the sense that all of the computers on that particular network have access to the information at all times.
Acquiring new Bitcoins is done though a process that involves computer coders solving complex mathematical equations and the first to do so gets rewarded with Bitcoins. These coders are referred to as “miners” and you will hear the term mining for Bitcoins.
In the Bitcoin network, all of the transactions are verified, are cleared and then are stored in a “block” every ten minutes. Each “block” is then connected to the block that was created ten minutes earlier, so a chain is produced. Validation involves a reference to the previous block. This system is really a giant ledger that is time stamped. To make a change after the fact would obviously involve revising not just one block, but the whole chain. Not totally impossible, but crazy complex, difficult and expensive.
So, while the focus of this publication is not Bitcoin, it is good to understand how the Blockchain technology originally developed, and how it works with Bitcoin so that we can envision its usefulness in other contexts.
As we stated above, Blockchain has no single central database, so no one single person is in a position to defraud or hack the system. If information in one location is changed on a previously created block, and does not coincide with the information on all of the other blocks, then that information is deemed unreliable and the consensus of the network rules.
Some economists refer to Blockchain technology as the global trust machine, and by that they mean that there is this giant network of computers that are operating in unison to reach a consensus on what is true.
Can transaction history ever be changed? In the Bitcoin system there is a theoretical concept known as the “51% attack.” The 51% attack would be where one entity came to control more than half of the network’s computing power. Many people do not believe this to be a real issue, but others view it as a flaw in the Bitcoin source code. This potential problem is being addressed by other companies who are developing additional uses for Blockchain technology, which does not involve Bitcoin.
Blockchain varieties
As you can imagine, there is a lot of potential in the area of customization of different decentralized systems. From a generic point of view, at the moment most people recognize three distinct types of Blockchain models. Those models are the public blockchain, the private blockchain and the one in between, referred to sometimes as the partial decentralized blockchain.
Public Blockchain or Public Ledger
This ledger is fully decentralized, and all transaction are fully transparent to the public. A public blockchain needs no central third party to act as a middleman. Bitcoin is the ultimate example of a public blockchain, open to all, and transparent to the public.
Private Blockchain or Private Ledger
This is the opposite of the public blockchain system. In the private blockchain the distributed ledger is private. Usually this includes only one entity the controls all of the changes to the ledger, which is distributed to all of the participants. The might be typical in a situation involving highly regulated entities such as banks. For example, all of the approved participants have access and maintain all transactions on their servers so that every transaction in the past can be confirmed by the group, but only one entity can add new transactions. If someone tries to make a change on a prior transaction, it can be confirmed as fraudulent since the change does not appear on the computers of the other participants.
Partial Decentralized Blockchain
This is a distributed ledger where a predetermined limited number of the participants can validate transactions and add transactions to the blockchain, but all participants have access to the blockchain. This is a hybrid of the two extremes explained above. It is a smaller universe than the public blockchain, and like the private blockchain described above it, all participants maintain the same information. The big difference is that you can have more than one party adding new transactions to the blockchain.
Ethereum
We would be remiss if we failed at this point to mention Ethereum. Ethereum was originally conceived by a programmer who had worked on Bitcoin. The intent was to create a platform that was more robust so that future applications could be more easily created, and that such applications could be more widespread.
The short version of the story is that it was developed in 2014 and launched in mid-2015. One of the ideas of Ethereum was to create a platform that would make it easier to use as a base to create smart contracts. Ethereum also involves a digital currency called “Ether.”
Bloomberg once described Ethereum as “shared software that can be used by all but is tamperproof. The New York Times said that it is used as a platform for decentralized applications and smart contracts. At this writing, literally hundreds of companies are working on building applications using Ethereum as a base.
To this writer, Bitcoin is merely a digital currency, while Ethereum is a digital currency and much more, it is a basis for the creation of hundreds of different applications by many different types of businesses.
While there are now many different digital currencies, by far the top three are Bitcoin, Ethereum and Ripple. Ripple is active in the banking sector.
Hopefully, you now know more than most of the people in the world about Blockchain.